TMI Blog2018 (11) TMI 884X X X X Extracts X X X X X X X X Extracts X X X X ..... oth interest and the principal amount. In cases of delay in repayment of such EMI by the customers, the Applicant collects penal/default interest (penal interest), in terms of the agreements executed by the customers. The same is calculated at a percentage not exceeding a fixed percentage, on the overdue loan amounts of the customer. The percentage of penal interest varies from customer to customer. The amounts collected by the applicant from their customers are nothing but amounts towards Penalty / Penal Charges and can in no way be construed as additional interest. Such penalty/ penal charges are collected by them from their customers for the reason that the said customers have delayed the payment of EMI and the applicant has tolerated the said act of their customers of delaying payment of such EMI. The applicant has agreed to do an act (the act of tolerating, of delayed payment of EMIs by their customers) and such act, by the applicant, squarely falls under clause 5(e) of the Schedule II mentioned above and therefore the amounts received by the applicant for having agreed to do such an act, would attract tax liability under GST laws - The receipt of penal charges on delaye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore such amounts received, would attract tax liability under GST laws. - GST-ARA-22/2018-19/B-85 - - - Dated:- 6-8-2018 - SHRI B.V. BORHADE AND SHRI PANKAJ KUMAR, MEMBER PROCEEDINGS (under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017) The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as the CGST Act and MGST Act ] by Bajaj Finance Limited, the applicant, seeking an advance ruling in respect of the following questions: i) Whether the Penal Interest is to be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017, Sr. No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017, and Sr. No. 28 of Notification No. 9/2017 Integrated Tax (Rate) dated 28.06.2017? ii) If the answer to the above is negative, Whether the activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime? At the outset, we would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a sample auto loan agreement in respect of penal interest is reproduced below for ease of reference: 1. DEFINITIONS AND ABBREVIATIONS, r. penal Charges shall mean and include overdue charges on non payment of installment on the due date. .. II. TERMS OF THE LOAN: 3. The Borrower agrees and confirms that: (iv) BFL is entitled to levy penalty as follows on default (a) for continuing non payment of amount due, a penalty not exceeding 3% per month on amount due calculated on pro-rata basis from due date till actually paid as per clause B of the schedule. ..Emphasis Supplied 6. The amount of penal interest collected from the customers are accounted by the Applicant in its core accounting platform i.e. SAP under General Ledger Code 60000150. 7. Under the GST (implemented from July 01, 2017), the Applicant is of the view that penal interest collected from the customer is in the nature of additional interest, and therefore, the same is not subjected to GST levy. However, given the ambiguity on taxability of penal interest under the GST law, as an abundant caution, the Applicant is filing the present application for Advance R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iption of Services Rate (per cent.) Condition (1) (2) (3) (4) (5) 27 Heading 9971 Services by way of (a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services): Nil Nil A.3 Similar exemption has been granted by the respective State Governments in respect of the State Goods and Services Tax (SGST ) leviable on intra-state supplies. The Serial No. 27 of Maharashtra State Notification No. 12/ 2017-State Tax (Rate) dated 29.06.2017 provides for the exemption to the above said services provided in the State of Maharashtra. Further, similar exemption has been granted by the Central Government vide Serial No. 28 of Notification No. 9/2017-lntegrated Tax (Rate) dated 28.06.2017, in respect of the Integrated Goods and Services Tax ( IGST ) leviable on inter-state supply of the above said services. A.4 In view of the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which represents consideration for use of money for that specified period of time. Similarly, when the customer delays the payment of installment of loan beyond the due date as provided in the agreement, the Applicant levies additional interest (which is termed as Penal Interest ) for use of the money beyond the stipulated period of time by the borrowers/customers. The manner of calculation of such Penal Interest substantiates that the penal interest is the time value of money, in as much as the same is calculated at a fixed rate per annum on the overdue loan installments for the period of delay. In this regard, the sample working of the penal interest is already enclosed as Annexure-3. A.8 Hence, in view of the above, it is submitted that the penal interest collected by the Applicant is nothing but interest on loans only. A.9 It is relevant to note that the term interest has been discussed at length by various Courts holding that interest is the return or compensation for the use or retention by one person, of a sum of money belonging to or owed to another. In this regard, reliance is placed on the Supreme Court judgment in the case of Central Bank of India vs. Ravin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of that supply, which is interest. Therefore, any treatment given to the main consideration (i.e. interest) shall also be equally applicable to such amount (i.e. penal interest). Hence, even by applying the said provision in the present case, the penal interest so collected by the Applicant would be having the same tax treatment as in the case of interest, and therefore, it would be exempt from GST under the Exemption Notifications referred to in para A .2 A.3 above. B. Without prejudice to the above, assuming without accepting that Penal Interest is not interest, the same shall not be treated as a consideration for any supply. B.1 Without prejudice to the above, assuming without accepting that Penal interest is not interest, the same shall not be treated as consideration for any supply. It is submitted that the term consideration is defined under Section 2 (31) the CGST Act as under: (31) consideration in relation to the supply of goods or services or both includes (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of default committed by the customers in making repayment of overdue loan installments in time. Therefore, it is submitted that the penal interest is not recovered by the Applicant in lieu of, or, in return for any activity performed by the Applicant. B.8 The Applicant would like to bring your attention to clause (d) of sub-section (1) of Section 7 of the CGST Act, which states that the expression supply also includes the activities to be treated as supply of goods or supply of services as referred to in Schedule II. Entry 5 of Schedule II specifies the list of activities to be treated as supply of services, which inter alia contains clause (e), which reads as agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act'.. B.9 It is submitted in this regard that the expression to tolerate an act used in the above clause. should be understood to cover instances where the consideration is being charged by one person. in order to allow another person to undertake any particular activity. These are the cases, where it is clear at the very inception that the intention of one party is to undertake an activity and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed supply under Clause (e), Entry 5 of Schedule II of the CGST Act. Hence, the penal interest collected for the delay in payment of loan installment cannot be treated as consideration for any supply, and accordingly, is not taxable under the GST regime. C. Without prejudice to the above, penal interest is in the nature of liquidated damages/penalty. C.1 Without prejudice to the above submissions, it is further submitted that the penal interest collected by the Applicant is merely in the nature of penalty/ liquidated damages for default in loan repayments by the customers, which would not be subjected to GST levy. C.2 Its Submitted in this regard that liquidated damages/ penalty are merely compensation for making good the loss suffered by a contracting party due to breach of terms of the contract by other contracting party. There is no additional benefit given under the main contract of supply of service, in return for the liquidated damages. C.3 Attention in this regard is brought towards Section 73 of the Contract Act, which statutorily allows the aggrieved party to recover damages from the defaulting party in case of default or breach of terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply because a payment for genuine damages, which is not consideration for any earlier or current supply, cannot be said to be made in connection with any supply. The lessor merely exercises his right to terminate and the payment is in the nature of damages for the lessee s breach of the lease which gave rise to the lessor s right to terminate. Thus, in the above Ruling issued under Australian GST, it has been clarified that mere payment of an amount under a damages claim is not a supply and hence, GST is not payable on Such payment. C.8 Further, GST Determination No. 2005/6 has been issued to answer the question as to whether a club, association, trade union, society or co-operative (referred to as association in the Determination) makes a supply when it imposes a non-statutory fine or penalty on a member for a breach of the association s membership rules. The said GSTD clarifies that there is no supply made by an association when it imposes a fine or penalty on its member for a breach of its membership rules, and the payment of the fine or penalty is therefore not a consideration for a supply and hence not subjected to GST. It has been clarified in the above GSTD that if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion 3.2. Based on the above provisions and discussions, the Applicant is convinced that the activity of collecting the penaI interest will not be Subjected to GST, in as much as the same is in the nature of interest on loans, which is exempt from GST. Further, even if it is assumed that the penal interest collected by the Applicant, is not interest on loans, then, the same being in the nature of liquidated damages/ penalty, would not be treated as a consideration for any supply, and therefore, will be outside the levy of GST. Additional submissions on 06.08-2018 Synopsis of submissions made in Appln. dt 09.05.2018 during personal hearing held on 27.06.2018 18.07.2018. A. The Applicant is only engaged in the business of lending/financing to customers, and the amount charged as penal interest is nothing. but interest on loans. which is exempt from GST. A.1 The Applicant is a Non-Banking Financial Company, inter alia engaged in providing various types of loans to the customers such as auto loans, loan against property, personal loan, consumer durable goods loan, etc. It is submitted that interest on loans have always been kept outside the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith effect from 19.04.2006, the interest on loans was excluded from the value of taxable service under clause (iv) of Rule 6(2) of the said Rules. The said provision is extracted herein below for reference: *6 Cases in which the commission costs etc. will be included or excluded. - (1) Subject to the provisions of section 67, the value of the taxable services shall include, - (2) Subject to the provisions contained in sub-rule (1), the value of any taxable servicer as the case may be, does not include - (iv) interest on loans. .Emphasis Supplied Front 01.07.2012 upto 30.06.2017 - Interest on loans was exempted under Negative List clause (n) of Section 660 of the Finance Act 1994, A.5 With effect from 01.07.2012, the Negative List regime was introduced, wherein all services, except those covered in the negative list or exemption notification, were taxed. The interest on loans was exempted under Negative List clause (n) of Section 66D of the Finance Act, 1994, which read as under; SECTION 66D. Negative list of services. - The negative list shall comprise of the following services, namely: - (n) services by way of - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or in respect of any credit facility which has not been utilised; Emphasis Supplied A.10 The above definition clearly states that interest means interest payable in any manner in respect of any moneys borrowed or debt incurred. This would not only include the normal interest Charged on loan installments, but also the interest charged for the delayed payment of such loan installments. A.11 In the present case, the Applicant is primarily engaged in the business of lending/ financing. As a consideration for lending/ financing, the Applicant charges interest from the customers at a particular rate, for the period for which such loan is granted. The principal and interest amount on such loan is repaid by the customers by way of equated monthly installments (hereinafter referred to as EMI ) over the tenure of loan. Accordingly, while computing the EMI, the Applicant charges and factors pro-rata interest payable on each due date, on the underlying assumption that the customers would not default in payment of the EMI on the due dates. However, in case of any default, the Applicant Charges additional interest for the number of days of default. This interest is commonly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lculated at a fixed rate per annum on the overdue loan installments for the period of delay. A.14 It is relevant to note that the position in the GST regime is similar to the position in the pre GST regime. Therefore, reference is made to the Revised Education Guide on Taxation of Services dated 20.06.2012 issued by the CBEC in erstwhile Service Tax regime. Para 4.14.2 of the said Education Guide, clarifies that the negative list clause (n) in Section 66D of the Finance Act, 1994, shall include any facility by which an amount of money is lent or allowed to be used or retained on payment of what is commonly called the time value of money which could be in the form of an interest or a discount. The relevant portion of the said Education Guide is reproduced herein below: 4.14.2 What are the services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount ? The negative list entry covers any such service wherein moneys due are allowed to be used or retained on payment of interest or on a discount. The words used are deposits. loans or advances and have to be taken in the generic sense. They would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Emphasis Supplied A.18 . In view of the above, it is submitted that even internationally, the Charges for deferment of payment are treated as consideration for exempt supply of credit, and therefore, the penal interest charged in the present case for deferment of the loan instalment should be treated as a consideration for exempt supply of loan, and hence, shall not be leviable to GST. B. In any case, penal interest is liable to be included in the value of main supply under Section 15(2)(d) of the CGST Act. and therefore. any treatment given to the main supply shall be given to the penal interest, and hence. shall be exempt from GST. B.1 Without prejudice to the above, it is submitted that in view of clause (d) of sub-section (2) of Section 15 of the CGST Act, the penal interest being an interest/ penalty for delayed payment of any consideration for a supply would be included in the value of that supply, which is interest. The said provision is extracted herein below for reference: 15. Value of taxable supply. (2) The value of supply shall include -- (d) interest or late fee or penal v for delayed payment of any consideration for any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract for the damages or compensation payable upon the breach of contract, the party suffering such breach has the statutory right to claim damages or compensation from the party who has broken the contract. C.3 The provisions of Section 73 and 74 are extracted herein below for reference: *73. Compensation for loss or damage caused by breach of contract. When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby , which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. 74 Compensation for breach of contract where penalty stipulated for. When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in future. Therefore, looking from this angle, the penal interest charged by the Applicant may be treated as penalty for the breach of the contract. In any case, if it is held to be not penalty, then, the same Shall be treated as liquidated damages. C.9 Therefore, in view of the above discussions, it is submitted that the penal interest charged in the present case shall be treated either as penalty or liquidated damages. C.10 It is submitted that payment of penalty or liquidated damages is not a consideration for any service, and therefore, the penal interest charged by the Applicant being in the nature of penalty or liquidated damages, cannot be treated as a consideration for supply of service, as they are merely damages for the breach of contract. C.11 It is a settled position in law that the stipulation for payment of damages upon breach of contract does not constitute a separate contract. It is only a part of the original contract. The payment of damages arises only on account of the primary contract, and it would be an incorrect interpretation to say that the payment is a consideration for any other contract. In the present case, there is only one contract betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Act, 1994, or the Rules made thereunder, therefore, reference is being made to the meaning given to it in other Statutes, and its dictionary meaning, as under: Section 2(a) of the Specific Relief Act, 1963: Obligation includes every duty enforceable by law. Commentary on Section 2(a) of the Specific Relief Act, 1963, by Pollock Mulla, at Pg. No. 1837 of Volume II, 14 th Edition, reads as under: Clause (a): Obligation An obligation is a bond or tie, which constrains a person to do or suffer something; it implies a right in another person which it is correlated. and it restricts the freedom of the obligee with reference to definite acts and forbearances; but in Order to be enforceable, it must be an Obligation recognised by law; and not merely a moral, social or religious one. An obligation may not be a legal one, where it cannot be reduced to a money value; legal obligation includes every duty enforceable by law so that when a legal duty is imposed on the person in respect to another, the other is invested with a corresponding legal right . This definition is used in its wider juristic sense as covering duties arising ex contractu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obligation, the Applicant is legally entitled to recover damages for such breach and also sue the borrower for such breach. D.6 It is further submitted that a sum which is payable in pursuance of a contractual obligation is different from a sum payable on a breach of contractual obligation. Therefore, the penal interest payable by the borrower on breach of its contractual obligation cannot be treated as a payment for any obligation on the Applicant towards the borrower. D.7 In view of the above discussion, it is submitted that in the absence of an agreement by the Applicant to any obligation to tolerate the act of non-payment or delayed payment of loan installments by the borrowers, the mere recovery of penal interest for breach of the contract does not constitute a service by the Applicant to the borrower. D.8 Hence, in view of the above submissions, as penal interest is not a consideration for any supply, no GST shall be levied on such penal interest. E. Even internationally, the damages for breach of contract are not taxed. E.1 It is further submitted that internationally, the damages received by way of compensation for termination or breach of a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne or penalty, the member continues to enjoy the same rights and privileges and it follows that the association is required to continue to provide the benefits of membership. In this sense, it cannot be said that the association makes a supply where it already has a pre-existing obligation to continue to provide the benefits of membership. E.6 Further, in a decision of the Court of Appeal (U .K.) in case of M/s. Vehicle Control Services Limited reported at (2013) EWCA Civ 186 , it has been observed that payment in the form of damages/penalty for parking in wrong places/wrong manner is not a consideration for service as the same arises out of breach of contract with the parking manager. E.7 In view of the above discussed rulings, it is submitted that the very purpose of liquidated damages or penalty is to restitute or make good the loss incurred by a person because of a default, non-compliance, etc., by the other person. Such liquidated damages or penalty may be in relation to some other supply of service or goods which would have a separate consideration and would be subject to certain terms and conditions. When such terms and conditions are not fulfilled, the defaul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) the activities to be treated us a supply of good or supply of services as referred in the schedule 2. As per schedule 2 para 5 clause (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act As per above provision Bounce Charges on Non-performance of a contract is an activity or transaction which is treated as a supply of service and the Applicant is deemed to have received the consideration in the form of charges, liquidated Damages and is accordingly, required to pay tax on such amount. 2) Definitions:- 31) Consideration in relation to the supply of goods or services or both includes (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; 3) Value of Supply: As per sub-section 1 or section 15 the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electronic Clearing System (ECS), etc. The installment of the loan is computed taking into consideration the amount of loan, duration of the loan and the amount of EMI that would be payable. The EMI paid by the customers is a fixed amount payable at a specified date, which includes both interest and the principal amount. In cases of delay in repayment of such EMI by the customers, the Applicant collects penal/default interest (hereinafter referred to as penal interest ), in terms of the agreements executed by the customers. The same is calculated at a percentage not exceeding a fixed percentage, on the overdue loan amounts of the customer. The percentage of penal interest varies from customer to customer. The Applicant is of the view that penal interest collected from the customer is in the nature of additional interest, and therefore, the same is not subjected to GST levy, the applicant has reproduced the relevant extract of clauses of a sample auto loan agreement in respect of penal interest which is as follows: 1. DEFINITIONS AND ABBREVIATIONS, r. Penal Charges shall mean and include overdue charges on non payment of installment on the due date. . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt of penal charges/penalty amounts would be for a supply made by the applicant. A supply defined under Section 7 of the GST Act is as follows:- 7. (1) For the purposes of this Act, the expression supply includes (a) all forms of supply of goods or services or both ..; (b) import of services for a consideration whether or not in the course or furtherance of business; (c) the activities specified in Schedule I, made or agreed to be made without a consideration; and (d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II. (2) Notwithstanding anything contained in sub-section (1), (a) activities or transactions specified in Schedule III; or (b) such activities or transactions undertaken by the Central Government .., shall be treated neither as a supply of goods nor a supply of services. (3) Subject to the provisions of sub-sections (1), and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as- (a) a supply of goods and not as a supply of services; or (b) a supply of services and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I appended to the GST Act as to which activities should be treated as supply of goods and which activities to be treated as supply of services . The clause does not define supply but classifies the supply into either supply of goods or supply of services . [Clause (e) of Schedule Il defines agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act as a Supply of Services]. Further, Sub-section (2) of section 7 states that--- certain, specified or notified activities shall be treated neither as a supply of goods nor a supply of services. We also find that Sub-section (3) of section 7 states --- that certain activities would be notified as being - (a) a supply of goods and not as a supply of services; or (b) a supply of services and not as a supply of goods. In the case before us we find that:- The applicant has given loans to their customers. The said loans were repayable by way of payment of EMI, which includes principal amount and interest. The EMIS are to be paid within due dates. Failure to repay EMIs by their customers result in penalty/penal charges being l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any manner in respect of any moneys borrowed or debt incurred... ..and therefore the word interest includes interest payable in any manner in respect of any moneys borrowed or debt incurred. They have further submitted that the Penal Charges collected by them is an additional interest for the delay in payment of loan installment beyond the due date and that while computing the EMI/installment amount, the interest is factored in the EMI on the assumption that all the installments would be paid on time. Here we would like to mention that the interest is calculated on the entire tenure of the loan given and then on that basis and the amount of loan EMIS are collected from their customers. The interest amounts are not calculated on a monthly basis and therefore it cannot be said that the default charges is for the period of delay not included in the EMI/installment amount. They have also submitted that the amount of overdue loan an installment is virtually a new loan transaction, the consideration for which is the penal interest charged on such overdue loan installment. This assumption by the applicant that the EMI is nothing but a new loan amount advanced to the applicant is not onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional interest as claimed by the applicant. We see from the definition of Additional Interest is given in the referred agreement which clearly indicate that the additional interest is not in the nature of interest but is penal charges. Thus we find that the consideration if any as received by the applicant would clearly qualify as supply as per Sr. No. 5(e) of Schedule II of the CGST Act which reads as under:- (5) Supply of Services : The following shall be treated as supply of services:- (e) Agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act. In the present case as per details presented before us, we clearly find that there is a clear understanding or agreement between the parties to foresee and tolerate an act or a situation of default on the part of loanees for a monetary consideration which is actually a consideration received by the applicant, though in the agreement they may be giving this consideration, other names such as penal interest , penal charges, penalty, etc. as thought proper by them, but these different nomenclatures in their Agreement would in no way change the actual nature of monetar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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